Despite strong sales since 2010, punctuated by the November 25, 2014 announcement that it had issued $207,501,000 of Fixed Rate Asset Backed Notes collateralized primarily by payment rights rights arising under court ordered structured settlement payment purchase contracts, JGWPT's NYSE per share price closed at $8.65 on December 12, 2014, down drastically from its 2014 high of $19.88 on March 4.

When JGWPT's Holdings IPO occurred November 8, 2013, with an initial offering price of $14.00 per share, one analyst opined the stock was worth at least $20 per share based upon JGW's "dominant franchise", access to securitization markets, low costs relative to competitors and "incalculable returns on capital", among other factors.

Zacks Investment Research published two reports earlier this month on December 2 ("JG Wentworth - Bear of the Day") and December 9 ("What Falling Estimates & Price Mean for J.G. Wentworth").

Zacks' conclusion: "A key reason for this [downward stock price] move has been the negative trend in earnings estimate revisions. For the full year, we have seen four estimates moving down in the past 30 days, compared with no upward revision. This trend has caused the consensus estimate to trend lower, going from $1.71 a share a month ago to its current level of $1.45."

What has caused JGW's negative trend in earnings estimates?

As summarized in S2KM's 2013 annual report about the structured settlement secondary market, JGWPT faced a multitude of problems and controversies prior to 2014. New and/or expanded problems have occurred during the past 12 months - in particular:

Brenston case law "progeny"; and

Washington Square v. RSL.

Brenston Case Law "Progeny"

In the Brenston case, the Illinois Supreme Court in December 2013 denied Peachtree's petition for review of an Illinois Appellate Court decision which found multiple Peachtree-Brenston transfer orders, previously approved in accordance with the Illinois transfer statute, to be void ab initio because:

Peachtree did not file all settlement documents with the transfer court.

The conduct of Peachtree and it's attorney amounted to an "affirmative falsehood and a fraud upon the trial court".

The denial of Peachtree's petition for review has substantially reduced the secondary structured settlement market in Illinois according to industry sources. Some annuity providers reportedly have refused to waive anti-assignment provisions in Illinois cases while others evaluate them on a case-by-case basis. In addition, some annuity providers are citing Brenston to challenge transfers in other states.

The Brenston case was also quickly followed by Sanders v. JGWPT Holdings, a class action lawsuit, accusing JGWPT Holdings, Inc., several affiliate companies including JGW and Peachtree, and Illinois attorney Brian Mack, of violating the Illinois Consumer Fraud and Deceptive Business Practice Act (ICFA). The case has since been removed to the Federal Court in the Southern District of Illinois with that court expected to rule on various motions and petitions in February 2015.

Washington Square v. RSL

In this case, transfer company Washington Square (aka Imperial) sued transfer company RSL Funding in Texas for tortious interference with a transfer agreement that had not yet been approved in a final court order. The Court of Appeals of Texas, Fourteenth District, held:

RSL was “justified” in interfering with Imperial’s proposed transfer agreement prior to court approval because obtaining a better price was in the seller's "best interest".

Transfer agreements that have not received court approval are not enforceable on public policy grounds and therefore cannot justify legal actions for tortious interference with existing contracts.

As a result of this case, a strategic marketing shift appears to be occurring within the structured settlement secondary market as rival transfer companies increasingly search court records and seek to outbid other transfer companies who are awaiting court approvals. This marketing shift may provide lower discount rates for some structured settlement recipients when they sell their payment rights. The impact on the secondary market, however, will be "chaos", according to some participants, including extra "informational" demands on the judicial system responsible for administering the state protection acts.

For JGW and Peachtree, who have invested millions of dollars to build their TV and Internet brands, this strategic marketing shift promises new, much less-well financed competitors. Like pilot fish, these competitors can be expected to offer competitive bids based upon public court filings of not-yet-approved transfers proposed by JGW and Peachtree (as well as other established transfer companies) rather than based upon their own independent marketing. Assuming this occurs, the likely per case results for JGW and Peachtree will be lower success ratios and higher costs.

ADDENDUM (added December 15, 2014) - JGWPT's September 10, 2014 Form S-1/A filing with the SEC identifies multiple "Risk Factors" at least two of which could impact other structured settlement stakeholders:

"[T]he insolvency or downgrade of a material number of structured settlement issuers." S2KM will discuss these rating downgrades, which include Genworth, Hartford and Aviva, in a subsequent 2014 annual report about ELNY and Reliance.

"[T]he impact of the March 2014 Consumer Financial Protection Bureau inquiry and any findings or regulations it issues as related to us, our industries, our products or in general." (emphasis added)

Change of Directions for JGWPT?

One apparent result of JGWPT's continuing problems and controversies has been a change of CEOs with Stewart Stockdale replacing David Miller in July 2014. Another result appears to be a more diversified strategy away from structured settlements.

In a November 13, 2014 press release, Stockdale stated: "We are in the early stages of transforming J.G. Wentworth and are excited about the groundwork we have laid to achieve the three key strategic pillars -- Grow the Core, Become an Information-Based Company, and Diversify." To date, this proposed transformation does not appear to have impressed investment analysts or positively impacted JGWPT's common stock.

Other 2014 Secondary Market Developments

Educational Dialogue - For the first time, educational programs sponsored by the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) featured representatives of the National Association of Settlement Planners (NASP) as participants in secondary market panel discussions. For the ninth consecutive year, NASP featured primary market representatives speaking about primary market issues at their annual educational conference. For summaries of these conferences, see the structured settlement wiki.

Case Law - In addition to the Washington Square and Brenston-related cases summarized above, noteworthy 2014 case law developments occurred in Texas and New York related to split payments and servicing arrangements. Two Texas cases required JGW to continue servicing arrangements under prior court approved orders and also to service subsequent assignments by the same payees to another transfer company. Multiple New York judges expressed their concerns about servicing arrangements while approving structured settlement transfers. At least 27 state structured settlement protection acts prohibit partial transfers. During 2013, MetLife began actively opposing transfers that involve split payments as well as court-approved servicing arrangements. Under such servicing arrangements, structured settlement annuity providers remit the entirety of specific periodic payments to transfer companies to administer even when the original recipient/transferor only assigns a portion of the payments.

State Legislation - Although structured settlement protection act (SSPA) activities occurred in Florida, Wisconsin, Minnesota, Louisiana, and Mississippi during 2014, only Minnesota enacted a legislative amendment. Minnesota amended its SSPA to require notice of the date and judicial district of any prior application for transfer filed by the transferee relating to a prior proposed transfer with the payee including whether the proposed transfer was approved or denied. If granted, such notice must provide the amount and due dates of transferred structured settlement payments, the aggregate amount, the discounted present value and the gross amount payable to the payee.

PLR-143928-13 - Issued by the Internal Revenue Service in August, this two-part private letter ruling approves favorable tax treatment for a structured settlement annuity which includes the possibility of a commutation by the recipient pursuant to a Notice of Hardship Conversion. In a prior blog post, S2KM described this PLR as potentially "game changing" because it overcomes an industry concern (enunciated in a 2006 Robert Wood article) that commutations do not qualify for favorable tax treatment afforded third party factoring transactions under IRC 5891.

Re-cycled payment rights - Representing a small fraction of secondary market sales, the resale to personal injury victims and their attorneys of payment rights previously acquired in a structured settlement factoring transaction (sometimes misleadingly referred to as "recycled structured settlements") continues to cause serious concern among most primary market participants. NSSTA considers engaging in or promoting the marketing or distribution of re-cycled payment rights to be risky, confusing and unregulated investment activity and inconsistent with its Mission.

Discount rates - Discount rates for structured settlement transfers vary widely depending upon multiple factors including: single vs. multiple bids; fixed vs. life contingent payments; size of payments purchased; length of payment deferral; perceived financial strength of the annuity provider; and/or state law (eg. North Carolina rate cap). The NCOIL State Structured Settlement Protection Model Act, which NSSTA and NASP have agreed to support, contains a definition for "discounted present value" which is generally higher than, and unrelated to, the discount rate actually incorporated into most structured settlement transfers. Regardless of discount rates, judges continue to deny proposed transfers that do not otherwise satisfy the "best interest" test. Reasons include: funds from prior transfer(s) were not used for stated purposes; stated purposes do not justify approval.

Secondary market sales

Based on interviews with industry experts in 2012, S2KM estimated 2012 structured settlement activity to be:

September 02, 2014

The Internal Revenue Service (IRS) has issued a Private Letter Ruling (PLR-143928-13) dated August 29, 2014 approving favorable tax treatment for a structured settlement annuity with annual payment adjustments based on the performance of the Standard & Poors 500 Index which also includes the possibility of a commutation by the Claimant pursuant to a Notice of Hardship Conversion. A copy of the PLR is posted on the structured settlement wiki.

Although PLRs do not identify requesting taxpayers, knowledgeable industry sources have identified Pacific Life as the product provider. A PLR is directed only to the taxpayer requesting it and may not be used or cited as precedent.

Pacific Life previously announced its Index-Linked Structured Settlement Adjustment Rider and has published a product brochure describing its features and benefits. The PLR describes the following three step formula by which Pacific Life adjusts applicable periodic payments on each annual payment anniversary:

"Step 2 determines the adjustment, which is the lesser of the Index Return or [a percentage cap]. If the Index Return is less than or equal to zero, the adjustment will be zero.

"Step 3 determines the annuity payment amount."

As to the Index-Linked feature, the PLR concludes:

The periodic payments "are fixed and determinable as to amount and time of payment within the meaning of § 130(c)(2)(A) even though they are calculated pursuant to an objective formula based on the performance of the S&P 500 Index"; and

The structured settlement indexed annuity "will not fail to qualify as a qualified funding asset under § 130(d) solely by reason of annuity’s variable payments."

For additional information about equity-indexed annuities and the Pacific Life Index-Linked Adjustment Rider, see this prior S2KM blog post.

Hardship Conversion Feature

The Hardship Conversion feature potentially represents a structured settlement industry "game changing" development. With the exception of Allstate and Symetra, each of which has exited the structured settlement primary market, no annuity provider, to S2KM's knowledge, offers its structured settlement annuitants a secondary market option.

Correction (9/3/2014) - S2KM has confirmed, subsequent to publication of this blog post, that Berkshire Hathaway does on occasion "accelerate" periodic payments under a court order upon request by Berkshire Hathaway structured settlement payees.

Although Pacific Life has not previously announced or offered a structured settlement Hardship Conversion, industry sources have informed S2KM they anticipate Pacific Life will begin offering a Hardship Conversion for all of its structured settlement annuities beginning in 2015.

The PLR describes the Hardship Conversion feature as follows:

"The Notice of Hardship Conversion provides that the Assignee will consider a request from Claimant to convert future guaranteed structured settlement payments to an immediate lump sum payment, in certain qualifying hardship circumstances, if the request is approved by a court or applicable administrative authority pursuant to a qualified order under § 5891(b)(2). The qualifying hardship circumstances are financial hardship due to medical expenses, expenses related to a terminal illness, home improvement expenses for handicap accessibility, job loss, loss of home, and the same type of expense for the payee’s dependents. Assignee expressly represents that it reserves the right to decline any hardship conversion request and that it will consider each hardship conversion request on a case-by-case basis. In addition, Assignee represents that it will not allow any hardship conversion in the first year after a qualified assignment."

As to the Hardship Conversion feature, the PLR concludes:

"The possibility of a commutation by Claimant pursuant to the Notice of Hardship Conversion will not affect whether the structured settlement assignment satisfies the requirements of a qualified assignment under § 130(c);" and

"The annuity purchased by Assignee will not fail to be a qualified funding asset under § 130(d) by reason of the Notice of Hardship Conversion."

ADDENDUM (added 9/3/2014): Following publication of this blog post, multiple readers have asked S2KM to further explain why PLR-143928-13 might prove to be a structured settlement "game changing" development.

As to the equity indexed-linked feature, see S2KM's prior blog post titled "Equity-Indexed Structured Settlements" which concludes: "The moribund U.S. structured settlement primary market needs a jump-start. Pacific Life's new equity-indexed structured settlement rider represents a welcome innovation and hopefully will become one catalyst for future market growth."

April 15, 2014

Continuing a series of workers compensation (WC) Medicare set-aside (MSA) regulatory compliance initiatives, the Centers for Medicare and Medicaid Services (CMS) has published a WCMSA Self-Administration (SA) Toolkit.

CMS' stated purposes for this Toolkit are to help WCMSA self-administrators:

Manage their WCMSA accounts appropriately.

Satisfy Medicare’s interests related to future medical care.

Ensure Medicare will pay future Medicare-covered costs related to their WC injuries when the WCMSA is depleted.

MSA Background

MSAs are administrative and funding mechanisms utilized in certain categories of settlements to protect Medicare's interests as "secondary payer" under the Medicare Secondary Payer (MSP) statute. Enacted in 1980, the MSP Act requires certain insurers, including liability, automobile, no-fault and workers compensation insurers, to make payment first for services to Medicare beneficiaries regarding claimed injuries, with Medicare responsible only as a “secondary payer.”

CMS, the agency responsible for administering Medicare policies, failed to take practical steps to enforce the MSP rules until 2001 when it issued the first of several policy memoranda addressing WCMSAs. These policy memoranda created a format, checklists and procedures for seeking approval for WCMSAs to "protect Medicare's interests" when workers compensation cases are settled.

Several of these WCMSA policy memoranda address, directly or indirectly, structured settlement issues. One of these policy memoranda (dated October 15, 2004) addresses WCMSA present value calculations and provides an important pricing advantage for annuity funding compared with lump sum funding.

During 2013, CMS published both an 88 page WCMSA Reference Guide (WCRG) and a 13 page supplement (WCRG Version 2.0). The WCRG's intended purpose is to help WCMSA professionals, beneficiaries and other stakeholders "understand CMS' [WCMSA] amount approval process and to serve as a reference for those electing to submit such proposals to CMS for approval."

Significantly for structured settlements, WCRG Appendix 4 defines "present-day value" as "the cost to fund a WCMSA annuity" and further states: "[t]he WCRG follows all CMS policy memorandums currently in effect."

Although CMS and its field offices have also issued informal guidance about the use of MSAs in liability cases, nothing comparable exists to the CMS WCMSA memoranda, WCRG or WCMSA SA Toolkit. As a result, there currently is no consensus among tort practitioners as to whether and when MSAs are required in liability cases. Anticipating publication of MSA rules for liability cases, however, CMS has published HHS/CMS RIN: 0938-AR43.

Structured Settlements - Comparing the WCMSA SA Toolkit and the WCRG

Although both the MSAWC SA Toolkit (Toolkit) and the WCRG both address structured settlements in multiple sections, the administration (post-settlement) focus (including structured settlements) of the Toolkit is narrower than the WCRG and its treatment of structured settlement issues is generally less comprehensive.

Section 13: Letters and Examples - which includes three sample structured account attestation and expenditure letters which do not appear in the WCRG:

Annual attestation.

Temporary exhaustion.

Permanent exhaustion.

Section 14: Glossary - The Glossaries of the both Toolkit and the WCRG include definitions for "structured settlement". Although consistent, the two definitions are worded slightly differently. Neither definition mentions annuities or references the tax definition for "structured settlement" in IRC 5891(c)(1).

The Toolkit does not address structured settlement issues which appear in the following WCRG sections:

March 31, 2014

In addition to its other accomplishments (most notably publication of "Standards of Professional Conduct for Settlement Planners"), the Society of Settlement Planners (SSP) has distinguished itself by sponsoring educational programs addressing issues, featuring speakers and permitting perspectives the more defense-oriented National Structured Settlement Trade Association (NSSTA) traditionally has been reluctant or unwilling to offer.

SSP's 2014 Annual Conference, to be held April 27-29 in New Orleans, promises to continue this more open-minded educational tradition.

SSP's Secondary Market Panel, which will be moderated by Patrick Hindert (S2KM's Managing Director and blog author), should be educational and entertaining - and hopefully somewhat controversial. Here are some of the questions the featured panelists will address.

Overview

Is the secondary market good or bad for the primary structured settlement market?

Among other objectives, IRC 5891 and the Model State Structured Settlement Protection Act (Model Act) were enacted to protect claimants from predatory secondary market business practices. Both NSSTA and NASP supported these statutes. How successfully have these statutes accomplished their objective to protect structured settlement recipients?

Based upon your experience, what changes or amendments, if any, would improve the Model Act?

Would adding a multiple bid requirement as part of the "best interest" test improve the secondary market?

What have NASP, NSSTA and/or other primary market participants done to address these issues? What should they do?

Falsified Orders

Reports indicate a former paralegal at the New York law firm Paris & Chaikin falsified as many as 100 transfer orders?

What happened? What is the status?

How will these events impact the secondary market and its various participants including: the law firm, its secondary market clients, the annuity providers and the structured settlement recipient/transferors?

Anti-Assignment Restrictions

Recent (Brenston) and current class action (Sanders) cases in Illinois address the impact of "anti-assignment" restrictions on transfers of structured settlement payment rights.

What is the status of these cases and related litigation? What are the issues?

Does the recommended assignment language in NSSTA's Model Qualified Assignment and Release Agreement solve this problem - or is some other solution necessary?

What case-specific responsibilities do structured settlement brokers, settlement planners and other plaintiff advisers have related to anti-assignment restrictions?

Primary Market Responses

MetLife recently adopted controversial new business practices whereby it opposes transfers that involve split payments as well as court-approved servicing arrangements.

What is MetLife's rationale and objective?

How are these business practices impacting the secondary market?

The Florida state legislature is considering a bill that would add a maximum discount rate (similar to North Carolina) to its existing protection act..

Is this a good idea?

How has the North Carolina provision impacted the secondary market in that state?

Why haven't more annuity providers offered commutation-like alternatives to third party factoring transactions? What impact would such alternatives have on the existing primary and secondary markets?

RLS Arbitrations

RLS (formerly Rapid Settlements) has attempted to use the Federal Arbitration Act to side step state structured settlement protection statute requirements.

What is the status of the related RLS litigation?

Conclusion

What other secondary market issues do you see as important for the future of structured settlements?

What opportunities exist for primary and secondary structured settlement market cooperation? What is preventing this cooperation?

For background about these secondary market issues, see the structured settlement wiki and more specifically these prior S2KM blog posts:

March 03, 2014

Publisher Law Journal Press anticipates a Spring 2014 distribution date for hard copy supplements for Release 55 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) with online S2P2J subscribers receiving their update automatically and simultaneously. Online S2P2J includes a search feature and download capability as well as link features to access individual book sections, appendices, footnotes, cases and statutes.

First published in 1986 and updated semi-annually, S2P2J is co-authored byDaniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert (S2KM's Managing Director). Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) have utilized S2P2J as an educational resource for their certification programs.

The original S2P2J publication (1986) included comprehensive chapters detailing respectively the roles and responsibilities of defense attorneys (Chapter 4) and plaintiff attorneys (Chapter 5) in structured settlements. These chapters continue to be updated reflecting new legislative and regulatory developments as well as changing business models and practices.

Release 54, for example, substantially expanded and re-organized S2P2J's coverage of defendant structured settlement disclosure issues. Release 55 enumerates a list of "best practices" for defense attorneys and includes a new structured settlement Appendix document to disclose material information about the costs, commissions and other elements of case specific funding. Release 55 also identifies and summarizes new structured settlement case law related to plaintiff attorney settlement planning, compensation and document drafting responsibilities.

Release 55 adds, as a new Appendix document, the SSP "Standards of Professional Conduct for Settlement Planners" which SSP describes as "rules of reason ... intended to impose high standards on professional settlement planners" including structured settlement consultants.

Release 55 expands S2P2J's anti-assignment analysis concluding that recent court decisions "should cause judges reviewing transfer petitions to require the full text of structured settlement documentation to see if an anti-assignment provision is present. Without such information, transfer approvals are subject to being found to be void ab initio and thus open to invalidation at any time."

February 19, 2014

A new Class Actionlawsuit has escalated the legal battle in Illinois concerning the impact of "anti-assignment" restrictions on transfers of structured settlement payment rights.

In the lawsuit, Plaintiff Valerio Sanders seeks to represent the following class:"Those individuals who sold part or all of their structured settlement annuities under the provisions of the Illinois [Structured] Settlement Protection Act, where the original structured settlement contract contained a valid and enforceable anti-assignment clause."

The Class Action Complaint alleges"the JGWPT entities ... intentionally failed to inform potential sellers that a valid and enforceable anti-assignment clause prohibited the sale of deferred payment annuities because the JGWPT entity intended to defraud the seller and the Illinois courts by filing false pleadings under the Illinois [Structured] Settlement Protection Act in order to obtain large amounts of deferred cash payments for discounted present lump sum amounts and reap the tax benefits of the same in violation of federal law."

Section 2 of the ICFA provides in part:"[U]nfair or deceptive acts or practices, including but not limited to the use or employment of any deception, fraud, false pretense, false promise, misrepresentation, or the concealment, suppression of omission of any material fact .... in the conduct of any trade or commerce are hereby declared unlawful ..."

The Class Action Complaint alleges Defendants used their advertising and solicitations to cause Plaintiff Valerio Sanders and other sellers to believe they could obtain cash for their structured settlement payment rights, "but intentionally failed to inform the potential sellers that if there was a valid and enforceable anti-assignment clause in the settlement contract, no lump sum payment could be received in exchange for the seller assignment the deferred payments because any such "order" issued by an Illinois court approving such a transfer would be void. Moreover, the legal proceeding would violate federal law."

The Class Action Complaint further alleges:

When a potential seller had a valid and enforceable anti-assignment clause, the JGWPT entities would routinely hire Brian P. Mack to obtain a "Qualified Order" pursuant to the Illinois Structured Settlement Protection Act so that the deferred payments could be purchased at a deeply discounted rate, and without any tax consequences.

Attorney Mack "would personally counsel the seller ... on how to create Illinois jurisdiction and venue, how to find a 'friendly court', how to avoid appearing in court, how to obtain the services of 'independent counsel', ..... or inform them they could waive the right, and how to finalize the details to obtain the lump sum payment."

Valerio Sanders' "Settlement Agreement and Release" included an anti-assignment clause which provided: "The periodic payments to be received by the Payee(s) pursuant to paragraphs 2B are not subject in any manner to anticipation, alienation, sale or transfer, assignment, pledge or encumbrance by Payee(s)."

The Petition filed by Mack claimed: "That the assignment does not contravene any federal or state statutes or the order of any court or responsible administrative authority."

"Mack knew that this allegation was false and misleading as Plaintiff's settlement contract had a valid and enforceable anti-assignment clause."

"....[F]ailure to inform Plaintiff that the order obtained from the court was in violation of Illinois and federal law was fraudulent and a material omission under the ICFA and a violation of the ICFA."

In a subsequent transfer involving Plaintiff Sanders and the Defendants, Mack's representation that jurisdiction and venue were proper was also a fraudulent misrepresentation because the action was filed in Madison County and the Plaintiff never lived in Madison County and the underlying action did not accrue there.

Plaintiff and putative class members relied on materials misrepresentations made by JGWPT entities and attorney Mack and sold payment rights under circumstances where the sale was contrary to Illinois law as well as the laws of various other states, "thus rendering the alleged transfers void, and were a fraud on the Internal Revenue Service of the United States government under 26 U.S. Code section 130."

The Complaint requests the court for an Order awarding both Plaintiff Sanders and the Class compensatory and punitive damages plus injunctive relief against Defendants to prohibit them from continuing to defraud the Class and the courts of Illinois plus attorney fees and costs.

Brenston Case

To support their legal arguments in the Sanders Class Action, Plaintiff attorneys: Cates Mahoney, LLC and Brad L. Badgley, P.C. cite six Illinois Appellate Court decisions (including Settlement Funding v. Cathy Brenston) upholding the enforceability of an anti-assignment clause in a structured settlement contract. The Complaint alleges Mack was attorney of record in Brenston plus three of the additional cited cases.

In Brenston, an Illinois 5th District panel, sitting for the 4th District Illinois Court of Appeals, held that an Illinois state court, which had previously approved transfers requested by Brenston:

Had a duty to enforce anti-assignment provisions in Brenston's original structured settlement documentation; and

Had no authority under the Illinois protection act to approve the transfer petitions - even though all of the relevant parties had waived the anti-assignment provisions.

A companion case involving Peachtree and Brenston remains on appeal in the 3rd District Illinois Court of Appeals and will be argued February 27, 2014. The parties had previously stayed their appeal waiting for the Illinois Supreme Court to rule on the 4th District case.

In a recent Florida case, summarized in this Drinker BiddleStructured Settlement Alert, a Sumter County Circuit Court Judge cited the Brenston case as authority in ruling that an April 2011 transfer order was void ab initio, and that resulting arbitration awards were “impotent and without substance.”

S2KM previously reported that a New York law firm had falsified court orders approving structured settlement transfers in as many as 100 cases - and possibly more. Industry sources have identified the responsible law firm as Paris & Chaikin where a former non-lawyer employee, apparently created the fraudulent, court-related documents. The primary transfer companies represented by Paris & Chaikin in these transactions were J.G. Wentworth, and its affiliate Peachtree Financial Solutions, as well as Stone Street Capital.

Paris & Chaikin has retained Pery D. Krinsky , according to industry sources, as outside ethics counsel for assistance with these cases. An online 2013 Speaker Biography states in part: "Pery’s ethics-based defense litigation practice focuses on: attorney ethics matters, representing judges before the Commission on Judicial Conduct, criminal defense matters, art law ethics & litigation matters, and representing law school students before the Committees on Character & Fitness. Pery serves as the Chair of the Ethics Committee of the Entertainment, Arts & Sports Law Section of the N.Y. State Bar Association. Pery also serves as Chair of the Committee on Professional Discipline of the N.Y. County Lawyers’ Association."

Ongoing investigations of these fraudulent transfers are being conducted by the New York State Courts and the New York County District Attorney's Office. Primary and secondary market representatives with whom S2KM has discussed these fraudulent transfers disagree on how they are impacting judicial attitudes toward structured settlement factoring transactions and factoring companies in New York.

Proposed Amendment to IRC 5891

Representative Matthew Cartwright (D-Pa) has introduced H.R. 3897, a bill which, if enacted into law, would amend IRC 5891 and impose standards and procedures which are substantially different than currently provided by the Model State Structured Settlement Protection Act (Model Act) and almost all of the 48 related state statutes.

The most controversial provision of H.R. 3897 appears to be proposed new paragraph (5) under current subsection (b) titled "Transaction Requirements" which would provide in part: "(A)" In General - A transfer of structured settlement payment rights shall be treated as satisfying the requirements of this paragraph only if the transfer meets the following requirements:

"(1) The annual discount rate of the consideration for the transfer, determined by taking into account charges, fees and other expenses, does not exceed the prime rate plus 5 percentage points.

"(2) The aggregate amount of the charges, fees and other expenses payable by the payee do not exceed 2 percent of the value of the consideration to the payee (net of such charges, fees and other expenses)."

This H.R. 3897 language is similar to provisions in the North Carolina structured settlement protection act. North Carolina is one of only three states which currently impose statutory ceilings on discount rates. A recent bill to amend the Florida structured settlement protection act likewise proposes a discount ceiling similar to North Carolina.

Note: following years of conflict, the primary market National Structured Settlement Trade Association (NSSTA) and secondary market National Association of Settlement Purchasers (NASP) reached an agreement in 2000 to support a combined federal and state legislative solution for structured settlement transfers which resulted in IRC 5891 and the Model Act. It is S2KM's understanding this agreement remains in effect.

Peachtree Settlement Funding v. Cathy Brenston

In 2013, an Illinois 5th District panel, sitting for the 4th District Illinois Court of Appeals, held that an Illinois state court, which had previously approved transfers requested by Brenston:

Had a duty to enforce anti-assignment provisions in Brenston's original structured settlement documentation; and

Had no authority under the Illinois protection act to approve the transfer petitions - even though all of the relevant parties had waived the anti-assignment provisions.

S2KM has learned that a companion case involving Peachtree and Brenston remains on appeal in the 3rd District Illinois Court of Appeals and will be argued February 27, 2014. The parties had previously stayed their appeal waiting for the Illinois Supreme Court to rule on the 4th District case.

In a recent Florida case, summarized in this Drinker BiddleStructured Settlement Alert, a Sumter County Circuit Court Judge cited the Brenston case as authority in ruling that an April 2011 transfer order was void ab initio, and that resulting arbitration awards were “impotent and without substance.”

During NASP's 2013 Annual Conference, NASP Executive Director Earl Nesbitt reported that MetLife has begun actively opposing transfers that involve split payments as well as court-approved servicing arrangements. Under such servicing arrangements, structured settlement annuity providers typically remit the entirety of specific periodic payments to transfer companies to administer even when the original recipient/transferor only assigns a portion of the payments.

Primary market proponents of MetLife's new policy argue that at least 27 state structured settlement protection acts prohibit partial transfers. In addition, they maintain that servicing contracts represents an annuity provider obligation and that post-transfer problems can occur from subsequent, multiple transfers resulting from such occurrences as divorces, child support obligations and improper transfers by trust beneficiaries.

In response, Nesbitt believes this "Hobson's choice", forcing injury victims to sell all or nothing, will cause "deep trouble" for MetLife and other annuity providers who may adopt MetLife's split payment policy. Nesbitt argues that annuity providers are protected by stipulation agreements and administrative fees. He predicts litigation, legislation and attorney general investigations could result.

Stock Market Prices

JGWPT Holdings, Inc. - JGWPT Holdings IPO, which occurred November 8, 2013, was poorly received with JGWPT Inc. reducing the initial offering price of its common stock from $19-$22 per share to $14.00 which then traded down to the high $12s. Since then, the common stock, which now trades on the New York Stock Exchange (symbol: JGW), reached a high of $18.00 per share and closed Friday January 31 at $16.992 per share.

Asta Funding Inc. - Asta, a publicly traded company (Nasdaq: ASFI), acquired an 80% ownership interest in CBC Settlement Funding, LLC ("CBC"), a structured settlement factoring company on December 31, 2013. Following announcement of the purchase on January 7, 2014, Asta's stock price closed during regular trading hours at $8.28 per share. The stock closed Friday January 31 at $8.20 per share.

Or, did the parties to the structured settlement waive the anti-assignment provision?

Although IRC 5891 and state structured settlement protection acts set forth procedures and conditions allowing transfers of structured settlement payment rights, courts continue to enforce anti-assignment restrictions when parties to the original structured settlement object.

Most transfer courts, however, have held that the anti-assignment restrictions are not self-executing and have granted transfers when no one objects. Objections to transfers by obligors and annuity issuers have become increasingly rare since the enactment of IRC 5891 and the state protection acts.

The Brenston Case

Settlement Funding v. Cathy Brenston represents a high profile and controversial case where an Illinois Appellate Court overruled prior state court approval of structured settlement transfers based upon anti-assignment restrictions - even though the parties to the original structured settlement waived the anti-assignment provisions. The case currently is subject to a petition for review by the Illinois Supreme Court.

In the Brenston case, an Illinois 5th District panel, sitting for the 4th District Illinois Court of Appeals, determined Brenston’s settlement agreement contained an enforceable anti-assignment provision. As a result, the panel decided the state court, which had previously approved requested transfers, had a duty to enforce the anti-assignment provision and “it had no authority under the Act to approve” the transfer petitions.

In other words, despite the existence of the Illinois transfer statute, the Appellate panel declared court orders approving assignments to be "void ab initio", as a matter of Illinois law, whenever structured settlement documentation purports to limit assignability.

If the Illinois Supreme Court upholds the Brenston appellate decision, or decides not to review it, the case would render the Illinois transfer statute "a practical nullity", according to an Amicus curiae brief filed by the National Association of Settlement Purchasers (NASP).

"Without the certainty and finality of a court order, there is no viable secondary market,"the NASP brief states."Because every structured settlement contains boilerplate language that purports to limit or restrict assignability, every Illinois court approved transfer could be subject to challenge at any time."

Public Policy

The validity of assignments, including structured settlement transfers, depends in part on public policy issues. Transfers arguably undermine the fundamental purpose of structured settlements - to provide spendthrift protection for injury victims and their dependents.

This public policy perspective is captured in the statutory history of the structured settlement tax exclusion. To qualify, IRC 130 provides in part "periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments"

Over time, many structured settlement documents have expanded this IRC 130 prohibition to include "transferred, assigned, mortgaged or encumbered" or words to that effect. (emphasis added). Although anti-assignment provisions are incorporated into many state workers compensation statutes, they are not specifically required by IRC 130, I04(a)(1) or 104(a)(2).

Factoring advocates offer competing public policy arguments to support structured settlement transfers. Unanticipated needs or poorly constructed settlement plans may necessitate immediate cash and outweigh other public policy considerations. Factoring advocates also criticize the "paternalistic" viewpoint of factoring opponents. They argue the structured settlement recipient, as owner of payment rights, should have the right to decide whether to transfer or assign those rights.

Many other statutes either permit or favor assignment of payments rights. These statutes include the 48 state structured settlement protection acts, IRC 5891, and recent revisions to UCC Article 9 as well as the Restatement (Second) of Contracts. Unfortunately, the authors of revised UCC Article 9 did not carefully consider the impact of their revisions on structured settlement transfers which has resulted in conflicting statutory language and interpretations among various states.

Best Practices

The National Structured Settlement Trade Association (NSSTA) amended its Model Qualified Assignment and Release Agreement following the enactment of IRC 5891 and the Model State Structured Settlement Protection Act. Paragraph 7, titled "Acceleration, Transfer of Payment Rights", now provides:

"None of the Periodic Payments and no rights to or interest in any of the Periodic Payments (all of the foregoing being hereinafter collectively referred to as “Payment Rights”) can be

i. Accelerated, deferred, increased or decreased by any recipient of any of the Periodic Payments; or

ii. Sold, assigned, pledged, hypothecated or otherwise transferred or encumbered, either directly or indirectly, unless such sale, assignment, pledge, hypothecation or other transfer or encumbrance (any such transaction being hereinafter referred to as a “Transfer”) has been approved in advance in a “Qualified Order” as defined in Section 5891(b)(2) of the Code (a “Qualified Order”) and otherwise complies with applicable state law, including without limitation any applicable state structured settlement protection statute.

No Claimant or Successor Payee shall have the power to effect any Transfer of Payment Rights except as provided in sub-paragraph (ii) above, and any other purported Transfer of Payment Rights shall be wholly void. If Payment Rights under this Agreement become the subject of a Transfer approved in accordance with sub-paragraph (ii) above the rights of any direct or indirect transferee of such Transfer shall be subject to the terms of this Agreement and any defense or claim in recoupment arising hereunder." (NSSTA's emphasis).

Brenston Status

Peachtree Settlement Funding, the transfer company involved in the Brenston case, has filed a petition for review with the Illinois Supreme Court. The Illinois Supreme Court will likely act on Peachtree's petition by December, although a decision whether to review could be delayed until February, according to NASP Executive Director Earl Nesbitt who reported on the case during the NASP 2013 Annual Conference. Assuming the petition for review is granted, Nesbitt stated a final decision is not expected for nine to 12 months.

Brenston Issues

NASP President Patricia LaBorde characterized the Brenston case as "troubling" for several reasons during a recent S2KM interview:

The initial answer is likely "almosteverywhere" within both the primary and secondary structured settlement markets - recognizing, of course, that this story has just recently been made public most significantly in JGWPT Holdings Inc.'s Amended S-1 Statement, filed October 28, 2013 prior to its November 8, 2013 public offering of common stock.

Until the facts of this apparent fraud become public (possibly through subsequent lawsuits), many key questions remain unanswered for most industry participants. Among those questions:

Who was responsible?

Why did they falsify the orders?

How many cases are involved?

Among collateral case participants, who knew, or should have known, what and when?

What will be the consequences?

Will the Internal Revenue Service impose IRC 5891 excise taxes?

Although outrage may seem justifiable as an appropriate industry response:

Who should be the target of the outrage?

What possible and realistic solutions exist?

Robin Shapiro's NASP Presentation

S2KM first learned about the falsified transfer orders at last week's NASP conference . During a luncheon presentation, former NASP President Robin Shapiro expressed his personal outrage about "troubling reports concerning the structured settlement factoring business." In addition to falsified transfer orders, Shapiro also highlighted and criticized other secondary market business practices:

Inter-state Forum Shopping - "It has been reported that some factoring companies aresigning up out-of state sellers to do deals in jurisdictions where judicial scrutiny is known to be limited -- listing what turns out to be a PO Box as their residence address."

Short-cutting Waiting Periods and Disclosure Requirements - Some factoring companies require sellers to "sign contracts and backdate [Shapiro's emphasis] disclosures so as to make it appear, at least in a paper file, that the seller was afforded the statutory 10 day wait between disclosure and signing."

Expediting Hearing Dates Before Preferred Judges - "Counsel for originators file multiple 'John Doe' court petitions as place-holders in a busy court, amending later with specific names and amounts, to secure an expedited hearing date and perhaps a hearing before a preferred judge."

"Competing Bids" from the Same Company - Consumers "get what appear to be 'competing bids' from two brands that are really one and the same company. The consumer thinks they've shopped around. Later, when the consumer discovers the truth, they feel tricked. And they complain - online and elsewhere."

"Perhaps most disturbing", Shapiro stated, is the public disclosure in JGWPT Holdings Inc.'s Amended S-1 Statement. "Think about that", Shapiro stated. "There may have been and may be "an unknown number of court orders that are "INVALID."' (Shapiro's emphasis).

Settlement Funding v. Cathy Brenston

Shapiro did not address Settlement Funding v. Cathy Brenston during his NASP presentation. NASP Executive Director Earl Nesbitt, however, provided conference attendees with a detailed report about this high profile and controversial case during his NASP conference case law update. Currently subject to a petition for review by the Illinois Supreme Court, this case (which also involves a J.G. Wentworth affiliate) concerns "invalid transfers" but not "falsified transfers"

In the Brenston case, a 5th District panel, sitting for the 4th District Illinois Court of Appeals, previously held that because Brenston’s settlement agreement contained an enforceable anti-assignment provision, the transfer court had a duty to enforce that provision and “it had no authority under the Act to approve” the transfer petitions. If upheld, the Brenston decision could prove more damaging to the structured settlement industry than the New York falsified transfers.

Shapiro's Proposed Solution

"If not addressed," Shapiro stated, "this kind of stuff is going to provoke a regulator and investor reaction that none of us is going to like. The answer is not simply making speeches here or making 'representations' that the rules are being followed. We're past that."

At his own factoring company, Shapiro has retained independent third party due diligence firms to sample and audit its receivable files and to provide independent third party verification of its compliance - "going forward AND back."

"As independent reviewers," Shapiro stated, "these auditors will be able to look where they want and test whatever they want. We don't have anything to hide. But we intend to let them know where to look and what to look for to expose corner-cutting."

Business Practices and Models

Bad business practices can destroy the structured settlement industry - whether they occur in the primary or secondary market.

Although outrage may seem appropriate, solutions are needed.

As industry leaders inevitably renew their advocacy for improved business practices and business models, they might benefit by reading (or re-reading) "Getting to Yes" which at one time represented a guidebook of sorts for the primary structured settlement market.

Perhaps the "Getting to Yes" method can be useful to help a divided structured settlement industry address problems that impact all industry stakeholders:

Separate the people from the problem.

Focus on interests not positions.

Invent options for mutual gain.

Insist on using objective criteria.

For additional information about secondary market business practices, see section 16.02[2] of "Structured Settlements and Periodic Payment Judgments" (S2P2J) and the structured settlement wiki.

July 23, 2013

Publisher Law Journal Press anticipates an October 2013 distribution date for hardcopy supplements for Release 54 of "Structured Settlements and Periodic Payment Judgments" (S2P2J)
with online S2P2J subscribers receiving their update simultaneously at
no additional charge.

Online S2P2J includes a search feature and
download capability as well as link features to access individual book
sections, appendices, footnotes, cases and statutes.

First published in 1986 and updated semi-annually, S2P2J is co-authored byDaniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) have utilized S2P2J as an educational resource for their certification programs.

Negotiating Structured Settlements vs. Cashing Out -
Why and when should defendants agree to structured settlements as
opposed to lump sum settlements? Do defendants save money using
structured settlements and, if yes, why and how? Do structured
settlements result in additional costs and risks for defendants and, if
yes, how do defendants reduce these costs and risks? Release 54 examines
these questions in the context of existing state statutes and case law
and offers recommendations for defendants when they review their
traditional structured settlement policies and business practices. The
recommendations include new sample structured settlement Mission and
Disclosure Statements for liability insurers.

Insurance Company Insolvencies
- Release 54 expands and updates S2P2J's already extensive coverage of
insurance company insolvencies including state insurance guaranty
associations and the most recent developments impacting Executive Life
of New York [ELNY] and Reliance Insurance Company. Following ELNY's 22
years of New York State supervised "rehabilitation", S2P2J's Release 54
identifies lessons that potential structured settlement recipients and
their attorneys and advisers can and should learn from the ELNY debacle.

Medicare Set-Aside Arrangements
- Release 54 re-organizes and promotes S2P2J's coverage of Medicare
set-aside arrangements (MSAs) with updated materials for both workers
compensation (WC) MSAs and liability MSAs. These updates include an
extensive summary and analysis of the structured settlement provisions
in the new CMS WCMSA Reference Guide as well as conclusions and
recommendations for utilizing MSAs in personal injury liability cases.

Re-cycled Structured Settlement Payment Rights
- As low interest rates continue to negatively impact the primary
structured settlement market, new products featuring re-cycled
structured settlement payment rights have begun to proliferate as
funding alternatives for personal injury periodic payment settlements.
Release 54 features a new section with detailed diagrams and charts (designed by Timothy Morbach) to
explain the several variations of these products. In addition, this new
section compares the features of these products with traditional
structured settlements and summarizes recent investor warnings about
these products issued by the SEC and FINRA.

Securitization of Structured Settlement Payment Rights - S2P2J already includes a detailed Chapter 16 titled "Transfers of Structured Settlement Payment Rights"
which provides comprehensive coverage of most structured settlement
secondary market issues. This coverage includes: the history of the
secondary market; summary and analysis of IRC section 5891 and the state
structured settlement protection acts; and how judges review (or should
review) transfer applications. Release 54 adds a new section, with
detailed diagrams and charts (designed by Timothy Morbach), explaining how securitization of
structured settlement payment rights works.

Australia Structured Settlement Update
- S2P2J continues to track structured settlement developments in
countries outside the United States including Canada, the United
Kingdom, Continental Europe, Australia and New Zealand. Release 54
highlights a recent legislative development in Australia called “The
Lifetime Care and Support Scheme” which provides treatment,
rehabilitation and attendant care services to people severely injured in
automobile accidents. At least one Australian structured settlement
expert believes this legislative development could prevent an
annuity-funded structured settlement market from developing in Australia
anytime soon.

"Structured Settlements and Periodic Payment Judgments"
is a complete reference work for attorneys, settlement planners,
structured settlement consultants, risk managers, liability insurers,
annuity providers and secondary market participants. It is available in
both hardcopy and online versions which are updated semi-annually. For highlights from previous S2P2J updates, see the structured settlement wiki.